Risk & Compliance Research Looks at How Mortgage Delinquencies Affect Scores

Mar242011

How much impact does a short sale have on FICO® Scores? How about a foreclosure? Since I frequently hear these questions from clients and others, I thought I’d share new FICO research that sheds light on this very subject.

The FICO study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780, respectively. I say “representative profiles” because we focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All consumers had an active currently-paid-as-agreed mortgage on file.

Results are shown below. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.

Mortgage Research chart-1
Mortgage Research chart-2

All in all, we saw:

  • The magnitude of FICO® Score impact is highly dependent on the starting score.
  • There’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
  • While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.
  • In general, the higher starting score, the longer it takes for the score to fully recover.
  • Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.

This study provides good benchmarks of score impact from mortgage delinquencies. However, it is important to note that research was done only on select consumer credit profiles. Given the wide range of credit profiles that exist, results may vary beyond what’s in the charts above.

If you have questions about this research, I encourage you to post them here on the blog.

7 Comments

  • Jax

    I would like to know why it takes so much longer for someone with a higher credit score to recover their credit. They’ve obviously proven themselves as people who care about their credit. Why would you penalize them for something that may be out of their control?

    • Ethan

      The key is in the use of the term “fully recover”. Consumers with higher FICO scores to begin with (and therefore little to no delinquency on their credit file) have further to
      climb to get back to their once pristine credit score levels. As the first table above shows, the higher scoring consumer C still has a higher score relative to the lower scoring consumers A and B, even after delinquencies are added to their files. It’s just that it will take consumer C longer to get back to the score of 780 than it will take consumer A to get back to a score of 680.

      • Jax

        I understand that. I guess my question would be more suited as, why is someone who has a 680 credit score, only losing 70 points, but, someone with a 780 loses 125 points. Obviously the person with the higher score has proven themselves. But, they’re the one who gets hurt the most. This formula doesn’t seem to be in the favor of someone who has done their best, something out of their control happens, and then, it’s game over for them, for the next 7 years. Yet, the person who didn’t necessarily care about their credit, they are back Ina better standing in 3 years.

        • Ethan

          Thanks Jax. I appreciate your interest in understanding how credit scoring works. FICO Scores are based on years of data analyzing consumer credit trends, and we’ve consistently found that a sudden change in a consumer’s behavior is often a symptom of further problems to come. That said, in the scenario in question, I’d advise focusing not on the size of the score drop after the delinquency occurs, but where the score ends up. While consumer C’s score is projected to drop by more points than consumer A’s, consumer C’s score after the delinquency is still some 70 points higher consumer A’s. In other words, consumer C is still being classified as a more favorable credit risk by the score than consumer A. Further good news is that the score is dynamic, reacting to any new information in the credit file as it is posted—so as additional positive information gets posted to a credit file, and any missed payments age, the FICO score will continue to rise.

  • Anna

    This information is from 2011. Are any of these modification arrangements looked upon more favorably now that it’s happened to so many people and the repercussions of the real estate crash continue to screw people (other people in the neighborhood doing short sales and driving my home value down)?

    • Ethan

      Thanks for the question, Anna. There hasn’t been any reduction in the impact of modification arrangements such as short sales on the score. We assessed the risk associated with these events as part of our recently released FICO Score 9 product, and the data indicated that consumers with such events in their credit file continue to represent significantly higher risk of repayment on future credit obligations.

  • Marisol Ojeda

    Does a foreclosure dismissed within 120 days allow you to recover more quickly than a discharged BK?